CHAPTER

11

Organizational Design: Structure, Culture, and Control

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Part 3 Strategy Implementation

112

Chapter Case 11

Zappos: An Organization Designed to Deliver Happiness

Zappos: Success through customer service

Customer service all in-house No scripts or timed calls

Flat Organizational Structure = Flexibility

Job rotation = trained talent
4 weeks of orientation training Including 2 weeks on customer service phones.
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EXHIBIT 11.1

Zappos Core Values

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LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.
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How to Organize for Competitive Advantage

Organizational design

Goal is to translate strategies into realized ones

Structure Processes Procedures

Structure follows strategies

Structure must be flexible

Yahoo failed to make changes to

their organizational structure.

Jerry Young ousted in 2008.

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11-10

Sources of Bureaucratic Costs

Number of Middle Managers Motivational Problems Coordination Problem Information Distortion

Bureaucratic Costs

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

Organizational Inertia and the Failure of Established Firms

Organizational inertia
Resistance to change

Often leads to failure because of the environmental dynamics: competition, technology, strategyetc.

Organizational strategy and structure are not static But rather are dynamic!

A tightly-coupled and coherent activity system that

works well in a static environment may be subject to problems of inertia in a dynamic environment.
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EXHIBIT 11.2

Organizational Inertia

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LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.
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The Key Elements of Organizational Structure Organizational structure determines

Work efforts of individuals and teams Resource distribution

Key building blocks

Specialization

Formalization
Centralization Hierarchy
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The Key Elements of Organizational Structure

Specialization: degree to which a task is divided
Division of labor

Example: U.S. Military (Army, Air Force, Navy, Marines)

Formalization: codified rules and formal procedures

Detailed written rules and policies

Examples: NASA, McDonalds

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The Key Elements of Organizational Structure

Centralization: where the decision is made
Centralized decision making slow response time and

reduced customer satisfaction

Example: BPs Mexican Gulf Oil Spill

Hierarchy: formal, position-based reporting lines

Tall structure vs. flat structure
Tall structure higher degree of centralization Flat structure lower degree of centralization

Span of control
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STRATEGY HIGHLIGHT 11.2

W. L. Gore & Associates: Informality and Innovation

Bill Gore articulated 4 core values

Fairness to each other

Freedom to grow knowledge and skills

Ability to make one's own commitments Consult with others before taking action

W. L. Gore is organized in an informal and decentralized manner

Empowered employees (no job titles, no job descriptions, informal team organization, soft reporting lines) Face-to-face communication All associates are shareholders of the company
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Assembling the Pieces: Mechanistic vs. Organic Organizations

Organic organizations
Low degree of specialization and formalization Flat structure Decentralized decision making Uses virtual team due to information

technology

Examples: Zappos, W. L. Gore, and many high-tech firms

Mechanistic organizations
High degree of specialization and formalization Tall hierarchy Centralized decision making

Example: McDonalds

Video on Web 2.0 Changing workplace

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EXHIBIT 11.3

Mechanistic vs. Organic Organization

LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.
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Matching Strategy and Structure

Simple structure
Small firms with low complexity
Top management makes all important strategic decisions Low degree of formalization and specialization A basic organizational structure

Examples: small advertising, consulting, accounting, and law firms

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EXHIBIT 11.4

Changing Organizational Structures and Increasing Complexity as Firms Grow

Functional Structure
Functional structure
Groups of employees with distinct functional areas

The areas of expertise correspond to distinct stages

in the company value chain activities

Example: College of Business, Finance Department , etc.

Recommended with narrow products/services

Matches well with business-level strategy
Cost leadership Mechanistic organization Differentiation Organic organization Integration strategy Ambidextrous organization

EXHIBIT 11.5

Typical Functional Structure

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EXHIBIT 11.6

Matching Business Level Strategy and Structure

STRATEGY HIGHLIGHT 11.3

USA Today: Leveraging Ambidextrous Organizational Design

USA Today: one of the widest print circulations in U.S. USA Today.com, a new independent SBU under Gannett Although attracted readers and advertising dollars, USA Today.com lost key editorial talent due to uneven resource distribution Integration of USA Today and USA Today.com to eliminate duplication of resources and reduce waste

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Functional Strategy: Drawbacks

Lacks effective communication channels across departments
Lack of linkage between functions Often solved the problems by having

cross-functional teams

It cannot effectively address a higher level of diversification

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Multidivisional Structure
Multidivisional structure
Consists of several distinct SBUs

Each SBU is operationally independent

Each leader of SBUs report to the corporate office Examples:
Zappos is an SBU under Amazon Skype is an SBU under Microsoft Paypal is an SBU under eBay

Companies using M-form structure

GE, Honda

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Organizing the Diversified Firm

The multidivisional organization, as documented by Alfred D. Chandler in Strategy and Structure, was pioneered in the 1920s by pioneering firms such as:
DuPont, General Motors, Sears and Standard Oil;

By 1967, two-thirds of Fortune 500 Companies are

multidivisional.

Organizing the Diversified Firm

Three key features of organizational structure:
1. The division of tasks; 2. The depth of the hierarchy (span of control); 3. The extent of authority delegation

(how much decentralization?)

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EXHIBIT 11.7

Typical M-Form Structure

Functional Structure

Matrix Structure

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11-19

Multidivisional Structure
Typical Chemical Company
CEO

Corporate Headquarters Staff

Oil Division (Functional Structure) Pharmaceuticals Division (Product Team Structure) Plastics Division (Matrix Structure)
Copyright 1998 by Houghton Mifflin Company. All rights reserved.

Multidivisional Structure
Use with various corporate strategies

Related diversification
Co-opetition among SBUs

Transfer core competences across SBUs

Centralized decision making

Unrelated diversification
Decentralized decision making Competing for resources
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EXHIBIT 11.8

Matching Corporate-Level Strategy

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Evolutionary Stability of the Multidivisional Form

Parable of the Two Watchmakers
10,000 parts

Watchmaker #1 needs to put all parts together or the watch falls apart and he needs to start all over with his 10,000 parts. Watchmaker #2 has developed 100 subsystems of 100 parts. This is the principle of near-decomposability (I.e., a system that contains localized sub-systems)

Evolutionary Stability of the Multidivisional Form

Hierarchical systems (containing sub-systems) will evolve much more rapidly from elementary constituents than will non-hierarchic systems containing the same number of elements. In organization theory this is called the effectiveness of loose coupling.
The advantage of loose coupling is that if

there is poor performance in division 2 it does not lead to failure of the entire system.

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Effectiveness of Multidivisional Form

Effective Divisionalization involves:
Identification of separable economic activities within

the firm; Giving quasi-autonomous standing to each division (usually of a profit center nature); Monitoring the efficiency performance of each division; Awarding incentives; Allocating cash flow to high yield uses; and Performing strategic planning (diversification, acquisition, and related activities).
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Weaknesses of Multidivisional Form

Dysfunctional Aspects of the Multidivisional:
Emphasis on short-term perspective;
Loss of economies of scope; Duplication of R&D, marketing, etc.;

Emphasis on financial manipulation instead of

developing firm capabilities and resources; and Large conglomerates may have excessive political power.

Matrix Structure
A combination of functional and M-form structure
Creation of dual line of authority and reporting lines Each SBU receives support both horizontally and

vertically Very versatile Enhanced learning from different SBUs

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EXHIBIT 11.9

Typical (Global) Matrix Structure

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EXHIBIT 11.10

Matching Global Strategy and Structure

LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.
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Organizational Culture: Values, Norms, and Artifacts

Organizational culture
Collectively shared values and norms Value: what is considered important Norms: appropriate employee behaviors

and attitudes Artifacts: expression of culture in items such as physical design, stories, and celebrations

Socialization
Internalize organizations value and norms through

interactions

Think of Zappos core values GMs culture became strategic liability

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Where Do Organizational Cultures Come From? Founder imprinting

Founders defined and shaped the culture Apple (Steve Jobs) Disney (Walt Disney) Microsoft (Bill Gates)

Wal-marts low cost culture by Sam Walton

Recruit people that fit the culture

Zappos vs. GE

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How Does Organizational Culture Change? Core competency core rigidity

Culture no longer has good fit with the environment Cultural change is needed

Cultural change
Brings new leadership Mergers and acquisitions

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Organizational Culture
Culture must be valuable, rare, inimitable, and non-substitutable (RBV)
Causal ambiguity and social complexity

Organizational culture is an important resource

Southwest Airlines

Friendly and energized employees work collaboratively

Zappos

Deliver WOW through service

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STRATEGY HIGHLIGHT 11.4

Cultural Change via Shock Therapy

Carly Fiorina at HP:

Carly Fiorina appointed CEO of HP in 1999

Engineered acquisition of Compaq in 2002

Carly Fiorina needed the acquisition to initiate structural and cultural change in HP to overcome inertia Board of Directors fired her in 2005 Hired Mark Hurd who was himself fired in 2010 Continued turnover at top of HP; Mark Hurd was replaced by Leo Apotheker, who in turn was replaced by Meg Whitman in September 2011 (see Chapter Case 12).

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Organizational Culture
Cultural impact on employee behavior
Motivates employees by appealing to their ideas
Strengthen employee commitment, engagement, and

effort

Culture is vital to an organization

Stronger founder imprinting leads to higher performance

Effective alignment allows development and refines

organizational core competency

How to Cut Costs Video
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LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.
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Strategic Control and Reward Systems Internal governance mechanisms

Culture Sanctions

Input controls
Rules and standard operating procedures Budgets Behavior guidelines

Output controls
Result-oriented ROWEs (results only work environment)
Dan Pinks RSA Video
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